U.S. Markets

Sino-U.S. trade dispute risks self-fulfilling downturn: RBA

SYDNEY (Reuters) - The Sino-U.S. trade dispute is causing businesses worldwide to put off investment decisions, crimping economic activity and risking a self-fulfilling global downturn, a top Australian central banker warned on Thursday.

FILE PHOTO: A worker walks past the Reserve Bank of Australia (RBA) building in central Sydney in this October 6, 2009 file photo. REUTERS/Daniel Munoz/File Photo

Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle also cautioned that the dispute over technology could prove even more damaging in the long run, forcing firms to chose between East or West rather than selling into a global market.

“On the tariff side, the prospect of a 25 per cent tariff is a first-order consideration in determining whether to invest in a new factory or new machinery and where to locate that investment,” Debelle told a conference on risk.

“Businesses are waiting to see how the uncertainty resolves rather than invest,” he added. “The longer businesses hold off, the weaker demand will be, which will further confirm the decision to wait. That runs the risk of a self-fulfilling downturn.”

Fears of a possible global recession hammered financial markets around the world on Wednesday, sending U.S. stocks down 3% and pulling yields on 10-year Treasuries below those on two-year paper. That inversion of the curve has been a reliable predictor of recessions in the past.

Debelle said the dispute was also eroding the system of rules-based trade that had lasted for decades

“We can see that manifest in the U.S.–Europe trade issues, as well as those between South Korea and Japan,” he said. “Trade is being used as the bargaining tool of choice, including for issues that don’t have much to do with trade.”

So far, the dispute had had a limited impact on Australia as Beijing’s economic stimulus had supported demand for Australian commodities, notably iron ore.

“But a further significant slowing in the Chinese economy and household incomes would clearly pose a risk,” said Debelle.

Domestically, Debelle said the main risk was the outlook for household consumption given unusually slow growth in incomes and wages.

This was one reason the RBA cut interest rates by a quarter point in both June and July, taking them to a record low of 1%.

“We do not expect much of an increase in wages growth although employment growth is expected to be reasonable,” said Debelle.

Lower rates and recent tax rebates should help support demand, though it was not clear how much would be spent or saved, he added.

House prices also looked to have stabilized after two years of declines, which should support household wealth.

“There are some near-term downside risks to the consumption outlook, including from a softer labor market,” Debelle said. “But further out, the risks to the outlook are more evenly balanced.”

Reporting by Wayne Cole; editing by Richard Pullin